M H Shafqaat
Pakistan’s economy is slowly picking up pace, with fiscal consolidation under the International Monetary Fund (IMF) programme. However, the tightening measures being employed are placing an immense pressure on the industrial sector. While the government remains committed to stabilising public finances, the concurrent rise in energy costs, increased taxation and liquidity challenges are severely impacting industrial competitiveness, employment levels and also hinging exports from reaching its full potential. These pressures, if left unaddressed, risk slowing down of industrial activity and undermining broader economic stability.
The textile sector, which accounts for nearly 60 percent of Pakistan’s export earnings and employs millions, is at the forefront of these challenges. Soaring energy prices have become one of the most significant obstacles to industrial sustainability. Electricity tariffs in Pakistan have now escalated to 16.6 cents/kWh, which is eroding competitiveness of Pakistani industry. Regional competitors and advanced economies have much lower energy rates: India 12.1 cents/kWh, Bangladesh 8.7 cents/kWh and Vietnam 7.5 cents/kWh. To further exacerbate the situation, the government has also increased the price of gas being provided to Captive Power Plants, from Rs 3000/MMBtu to Rs 3500/ MMBtu. A levy over and above this price is also being considered as a punishment to CPPs for not producing electricity at a price that is equal to electricity provided by the national grid. These cost disparities, and IMF-mandated surcharges, have substantially weakened the global competitiveness of Pakistani industries
The sharp rise in financial costs has also constrained investment in productivity enhancements. Policy rate in Pakistan was at a staggering 22 percent per annum (p.a.) till April 2024. It has now come down to 12 percent p.a. but is still much higher than our competitor countries: India 6.5 percent, Sri Lanka 8 percent, Bangladesh 10 percent and Vietnam 4.5 percent. Additionally, there is a multifaceted tax structure burdening exporters in Pakistan. Key components contributing to the effective tax rate for exporters include a Corporate tax of 29 percent on taxable income, a Super tax ranging from 1 percent to 10 percent based on income slabs, Workers’ Welfare fund (WWF) charged at 2 percent of taxable income, Workers’ Profit Participation fund (WPPF) charged at 5 percent of taxable income, Export Development Surcharge charged at 0.25 percent of export realisation, Minimum Turnover Tax of 1.25 percent of revenue from both local and export sales and additional advance tax at 1 percent of revenue. To elaborate, an exporter operating at a 1 percent profit margin may face an effective tax rate exceeding 158 percent of its profits, underscoring the disproportionate tax burden on low-margin businesses.
Historical precedents, such as Argentina in 2001 and Greece in 2010, clearly indicate how excessive austerity measures implemented by their respective governments without adequate industrial safeguards resulted in defaults and prolonged economic stagnation due to exhibited factors. If existing constraints persist, Pakistan could face widespread industrial shutdowns, increasing unemployment rate, and a constant reliance on external financial support, jeopardising its economic sovereignty.
To maintain a balance between macroeconomic stability and industrial viability, there is an urgent need to recalibrate our economic policies. It is recommended that regionally competitive energy tariffs be provided, i.e., electricity tariff of 9 cents/KWh and gas to CPPs at US$6–8 per MMBtu. Additionally, phasing out of gas supply to CPPs be reassessed, particularly in areas where grid reliability remains inconsistent. Strategic investments in domestic energy resources, including natural gas and renewable, are also required to reduce reliance on costly imports and for long-term energy security. Energy policy (Power and Petroleum) must be designed with a minimum period of three years to avoid shocks and uncertainty.
On the taxation front, a more pragmatic framework is needed to ease the burden on industries. Tax rates must be immediately rationalized. Advance Tax imposed at 1% be withdrawn and in case MTR is to be retained it should not be more than 1%. Export Development Surcharge should be immediately suspended until 75% of the amount already collected is used. A tiered tax system based on profitability should replace the current structure that disproportionately affects low-margin sectors. Export facilitation Scheme should be allowed on domestic purchases as it is vital to providing a level-playing field for domestic manufacturers supplying to export-oriented industries. The government should also clear all outstanding DLTL claims on an urgent basis so that industry is able to resolve its liquidity issues.
Economic policies being implemented in Pakistan must be aligned with its peculiar ground realities. This will ensure that measures implemented at the behest of IMF do not disproportionately burden Pakistan’s foreign exchange-earning industries. Stakeholder consultations must be prioritized to develop a balanced approach to economic policymaking, mitigating unintended effects on the industry. The sustainability of Pakistan’s economy depends on a well-calibrated approach that supports industrial growth while maintaining fiscal prudence. A forward-looking policy that creates a balance between fiscal discipline and industrial expansion is essential for securing Pakistan’s long-term sustainable economic growth.
(The writer is a Trade and Economic Policy expert with almost two decades of experience in Policy Formulation, Analysis and Implementation in various public sector organizations. Currently he is working as CEO of Pakistan Textile Council)